Liberal Democrat IT Online Policy Consultation

Commerce and Taxation over the Internet

The move towards electronic commerce in the form of consumers buying goods directly over the Internet has suffered from being heavily oversold. The dot.com boom of the late 1990s was based on predictions of people abandoning high street shops for Internet purchases that have patently not turned out to be true.

However, the extravagant hype and subsequent gloom that have accompanied the dot.com mania should not obscure the fact that a quiet revolution is taking place with the growth of electronic commerce. Business to business transactions have especially benefited from the increased ease and reduced cost of electronic commerce. And there are consumer sectors that are growing in strength on a “horses for courses” model. While most people clearly have a preference buying department store items in person, they are carrying out many other transactions such as banking and flight and holiday booking online.

One of the characteristics of electronic commerce is that it aims to mask the geographical distances between vendor and purchaser. A major selling point for businesses to engage in e-commerce is that they can sell to anyone anywhere as though they were a local business. However, the legal frameworks for commercial transactions are generally nationally based. This means that when a dispute arises there is the potential for confusion over the rules that should be applied to settle the matter.

Consumer confidence is essential to the further development of e-commerce. If it proves to be confusing, expensive and difficult to settle transactions because of the legal complexities of working across jurisdictions then this could discourage consumers. The European Union has been actively trying to resolve these questions by clarifying that the rules in the country of origin for any goods or services supplied that should be applied. It is also seeking to integrate the systems for seeking redress so that, for example, a citizen can access the consumer protection service of another EU state by going to their local equivalent. Liberal Democrats support this work as an important step in the development of e-commerce.

The development of e-commerce also carries with it major implications for taxation. The most obvious area of concern is over the collection of indirect taxes such as sales tax and value added tax. Many governments have shifted from direct taxes such as income tax and corporation tax over recent years towards taxes levied on goods.Yet, e-commerce has a global dimension that renders the collection of sales tax increasingly difficult.

In the UK, we have seen a major concession to this trend when the Government abandoned the collection of betting tax in the face of growing off-shore internet betting operations. It was recognised that tax could no longer be efficiently collected from the individual customers, but only from the profits of the betting companies based in the UK. VAT could not be abandoned so readily, but some of the same considerations apply to any discussion of future tax collection

We can also predict challenges to other forms of taxation as the global economy evolves. Businesses that operate a distributed model based on the use of IT will be looking for the most efficient way to fulfil their obligations in respect of corporation tax. And income tax liabilities become more complex as individuals find new ways of working as we discuss further in section 3.3 of this paper.

Liberal Democrat policies for well-funded public services are potentially influenced by the taxation question. We can anticipate major shifts in revenue raising patterns over the medium term. But these changes also need to be looked at in the context of tax policy more generally and any decisions by the party on public service funding. These are questions that need further consideration.